Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 2551/BANG/2019

Disposition

in part

Attorney(S)

Acts

INCOME TAX ACT 1961
(i) of sub-clause (c) of clause (6) of section 43; Page 3 of 18 (b)
sub-section (2) of section 288,
Section 50B(1) of the Income-tax Act

See more information ...

Smart Summary

Structured Summary of Tribunal Opinion

Factual and Procedural Background

This is an appeal by the Revenue (ACIT) against the order dated 30.09.2019 of the CIT(A), Mysuru, in respect of Assessment Year 2014-15. The assessee, M/s Bhoruka Aluminium Ltd., carried on an aluminium extrusion business which was sold by way of a business transfer agreement (BTA) dated 01.03.2013 (a slump sale) to M/s Bhoruka Extrusions Pvt. Ltd.

The BTA recorded a total enterprise value of Rs.110 crores. Clause 3.1.1 identified that amount, but clause 3.1.2 divided the consideration into an Initial Business Transfer Consideration of Rs.100 crores payable on closing and a Subsequent Business Transfer Consideration of Rs.10 crores payable upon fulfillment of certain events/conditions (Rs.5 crores on achieving specified sales and collection targets within two years; Rs.5 crores on clearing legal/tax disputes and other adjustments). The assessee received Rs.100 crores and a net current assets adjustment (Rs.3,47,21,564) at closing and did not include the contingent Rs.10 crores in income for AY 2014-15; part (Rs.4,38,20,000) was subsequently received and offered to tax in AY 2015-16.

The Assessing Officer (AO) treated the transaction as complete in the previous year relevant to AY 2014-15, held that the entire Rs.110 crores was the full value of consideration for slump sale and recomputed long-term capital gains accordingly. The CIT(A) reversed that view and held that the Rs.10 crores was taxable only in the year of its receipt because it was payable upon fulfillment of certain conditions. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), Bangalore ("A" Bench).

Legal Issues Presented

Whether, on the slump sale governed by the BTA dated 01.03.2013, the sum of Rs.10 crores (labelled "Subsequent Business Transfer Consideration" payable on fulfillment of contractual conditions) is required to be included in the full value of consideration and taxed as capital gain under section 50B (read with section 45) in AY 2014-15, or whether it can be taxed only in the year in which it is received/accrues.

Arguments of the Parties

Revenue (Assessing Officer / Department)

Section 45(1) and Section 50B(1) make profits or gains arising from transfer (including slump sale) chargeable in the previous year in which the transfer took place; therefore, the entire consideration agreed in the BTA (Rs.110 crores) must be adopted as the full value of consideration for AY 2014-15.
The conditions in clause 3.1.2 of the BTA are not conditions precedent to the transfer; they are post-transfer conditions for payment of additional sums. Clause 5.2, which sets out the conditions precedent for the transaction, does not make clause 3.1.2 a condition precedent.
The assessee's approach to offer only amounts received in the relevant year is a colourable device to postpone tax liability; taxability cannot be split across years contrary to statutory mechanism under section 50B.
Reliance was placed on Ajay Guliya v. ACIT to support charging whole consideration in year of transfer.

Assessee (M/s Bhoruka Aluminium Ltd.)

The BTA explicitly segregates the consideration into initial (Rs.100 crores) and subsequent (Rs.10 crores) portions; clause 3.1.2 makes the Rs.10 crores payable only upon fulfillment of specified contingencies (sales/collection targets; clearance of legal/tax disputes).
The Rs.10 crores was not receivable immediately and the assessee treated it as taxable in the year of receipt; part of it (Rs.4,38,20,000) was received and offered to tax in AY 2015-16.
Relied on the decision of the Bombay High Court in CIT v. Mrs. Hemal Raju Shete to support the proposition that deferred/contingent consideration which has not accrued as a legal right in the year of transfer is not to be taxed in that year; only amounts actually received or accrued (vested right to receive) can be taxed.
Also relied on Special Bench and High Court decisions (e.g., Vireet Investment SB; PCIT v. Mahipinder Singh Sandhu) and on authorities explaining accrual/receipt tests.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ajay Guliya v. ACIT (ITA No.423/2012, judgment dated 16.07.2012)	Held that where transfer takes place, the whole consideration agreed may be chargeable as capital gains in the year of transfer despite deferred payments; Tribunal and High Court treated full consideration as taxable in year of transfer in that factual matrix.	The Revenue relied on this decision to support taxing the entire Rs.110 crores in AY 2014-15. The Tribunal noted the decision as part of the competing authorities considered in argument.
CIT v. Mrs. Hemal Raju Shete (Bombay High Court, ITA No.2348 of 2013; 29 March 2016)	Held that deferred consideration which is contingent and does not vest as a legal right in the year of transfer is not taxable in that year; taxability depends on receipt/accrual (vesting of right) and the amount sought to be taxed must have accrued or been receivable.	The assessee relied on this decision to argue that the Rs.10 crores was contingent and not accrued in AY 2014-15. The Tribunal considered the decision but distinguished it: the Tribunal held that Shete related to section 45(1) facts and could not be extended to the special computation regime in section 50B.
Vireet Investment Pvt. Ltd., 58 ITR (Trib.) 313 (Special Bench)	Following the Supreme Court in Vegetable Products Ltd., holds that where two views are possible, the view favourable to the assessee should be followed.	The assessee cited this Special Bench decision in support of adopting a view favourable to it. The Tribunal recorded the reliance but applied the special statutory provisions in section 50B to reach its conclusion for the Revenue.
CIT v. Vegetable Products Ltd., 88 ITR 192 (Supreme Court)	Principle (as applied by the Special Bench) that where two views are possible, the view favourable to the assessee should be adopted.	Referred to by the Special Bench (Vireet) and noted by the Tribunal as part of authorities relied upon by the assessee; Tribunal did not apply that principle to override the clear statutory scheme of section 50B.
PCIT v. Mahipinder Singh Sandhu, 416 ITR 175 (Punjab & Haryana High Court)	Decision consistent with the Bombay High Court in Mrs. Hemal Raju Shete on the limited proposition about deferred/contingent consideration and accrual.	The assessee cited this decision in support; the Tribunal recorded it but found section 50B's special computation mechanism to be decisive in the present case and distinguished such authorities.
Morvi Industries Ltd. v. CIT (1971) 82 ITR 835	Authority cited for the proposition "The income can be said to accrue when it becomes due" (accrual principle).	Cited within the Bombay High Court's reasoning in Shete (as quoted in this opinion). The Tribunal considered the accrual arguments but held that section 50B prescribes a specific computation for slump sale which cannot be circumvented by contractual deferrals.
E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27	Authority cited for the proposition that income may accrue without actual receipt if the assessee acquires a right to receive the income (accrual on vesting of right).	Cited in the quoted passage from the Shete decision. The Tribunal noted these accrual principles but emphasized that section 50B's deeming and computation provisions govern slump sale taxation in the year of transfer.
Commissioner of Income-Tax v. M/s. Shoorji Vallabdas & Co. (1962) 46 ITR 144	Authority quoted for the view that Income-tax is a levy on income and that hypothetical income that does not materialize should not be taxed; relevance of accrual/receipt tests.	Appears in the Shete quotation relied upon by the assessee. The Tribunal acknowledged the authority but found the statutory scheme of section 50B controlling in this slump sale context.
K.P. Varghese v. Income-Tax Officer, Ernakulam & Anr. (reference in Shete)	Observation that capital gain provisions must be read with computation provisions and the starting point is "the full value of the consideration received or accruing".	Cited in the Shete judgment excerpt. The Tribunal considered this line of authorities but concluded that the special computation regime of section 50B displaces such arguments for slump sale situations.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded by reference to the relevant statutory provisions and the text of the BTA:

Statutory framework: The Tribunal recited section 2(42C) (definition of "slump sale") and section 50B (special provision for computation of capital gains on slump sale). It emphasized that section 50B is a special provision that prescribes the mechanism for computing capital gains on a slump sale and displaces other general provisions to the extent of inconsistency.
Mechanism under section 50B: The Tribunal noted that capital gains on slump sale are computed as the difference between the sale consideration and the net worth of the undertaking; net worth (as defined in Explanation 1 and related clauses) is deemed to be the cost of acquisition and improvement for sections 48 and 49, and indexing/other deviations are not permissible under section 50B.
Contractual analysis: The Tribunal closely read the BTA. It found that clause 3.1.2 (which described the Subsequent Business Transfer Consideration payable on certain events) did not constitute a condition precedent to the transaction's coming into effect. Clause 5.2 of the agreement contained the condition precedent language and made no cross-reference to clause 3.1.2. There was no contention that any clause mentioned in clause 5.2 was unfulfilled.
Factual conclusion on transfer: The Tribunal accepted that the undertaking was transferred in the previous year relevant to AY 2014-15 and that closing/transfer had taken place in that year.
Legal consequence: Given that the transfer occurred in the relevant previous year and that section 50B provides a specific computation regime using the full sale consideration, the Tribunal held there was no lawful manner for the parties to unilaterally postpone recognition of part of the sale consideration for capital gains computation by labelling it as contingent/post-closing or by contractual design. The Tribunal reasoned that section 50B permits no such deviation and must be applied in the year of transfer.
Treatment of precedents: The Tribunal considered the authorities cited by both sides. It acknowledged the Bombay High Court's decision in Shete and related authorities on accrual/receipt but explained that those decisions concerned section 45(1)/general accrual principles and the particular facts there; they could not be extended to vary the mandatory computation methodology in section 50B governing slump sales. It also noted the Ajay Guliya decision relied upon by the Revenue. Ultimately, the Tribunal gave primacy to the statutory mandate of section 50B and distinguished case law that did not address slump sale computation under that provision.

Holding and Implications

Holding:

The appeal of the Revenue is allowed.

Implications / consequences:

The Tribunal set aside the CIT(A)'s decision that treated the Rs.10 crores as taxable only on receipt; instead, the Tribunal held that the full sale consideration as recorded in the BTA (Rs.110 crores) must be adopted for computation of capital gains under section 50B for the previous year relevant to AY 2014-15 because the transfer of the undertaking was completed in that year and section 50B prescribes the computation mechanism for slump sale.
The direct effect is that the Assessing Officer's computation adopting the entire Rs.110 crores as sale consideration for purposes of section 50B is upheld, and the CIT(A)'s contrary view is reversed. The order directs that capital gains be computed in accordance with section 50B for AY 2014-15.
The Tribunal emphasized that the special statutory computation under section 50B cannot be circumvented by contractual arrangements to defer or condition part of the consideration; the decision does not purport to create a new general rule beyond applying section 50B to the facts at hand.
No express pronouncement was made that a novel precedent (beyond the statutory interpretation of section 50B) is being laid down; the decision is an application of section 50B to the facts of this slump sale and departs from CIT(A)'s allowance of taxing contingent deferred amounts only on receipt.

Show full summary ...

The Assistant Commissioner Of Income Tax, Circle- 1(1), Mysuru v. M/s. Bhoruka Aluminium Limited, Mysuru

IN THE INCOME TAX APPELLATE TRIBUNAL

"A" BENCH : BANGALORE

BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND

SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No.2551/Bang/2019 Assessment Year : 2014-15 ACIT, Vs. M/s. Bhoruka Aluminium Ltd., Circle - 1(1), No.427E, 2^ndFloor, Hebbal Industrial Mysuru. Area, Metagalli,

Mysuru - 570 016.

PAN : AAACB 8073 D

APPELLANT RESPONDENT

Assessee by : Shri. S. Ramasubramanian, CA Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.08.2022

Date of Pronouncement : 16.08.2022

O R D E R

Per N. V. Vasudevan, Vice President :

This is an appeal filed by the Revenue against order dated 30.09.2019 of CIT(A), Mysuru, relating to Assessment Year 2014-15.

2. The only issue that arises for consideration in this appeal is as to whether the CIT(A) was justified in holding that a sum of Rs.10 Crores cannot be brought to tax as capital gain under section 50B of the Income Tax Act, 1961 (hereinafter called 'the Act') on slump sale of one it's undertaking by the assessee under business transfer agreement dated 01.03.2013, in AY 2014-15. As per section 2(42C) of the Act, 'slump sale' means the transfer

Page 2 of 18

of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Section 50B of the Act, provides the mechanism for computation of capital gains arising on slump sale and is as follows:

Special provision for computation of capital gains in case of slump sale. 50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.

(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :

Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,—

(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (c) of item (i) of sub-clause (c) of clause (6) of section 43;

Page 3 of 18

(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and

(c) in the case of other assets, the book value of such assets. A reading of Sec.50B (1) of the Act read with Sec.2(42C) of the Act, it is clear that taxability of capital gain on slum sale arises in the year of transfer of the undertaking. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between 'the aggregate value of total assets of the undertaking or division' and 'the value of its liabilities as appearing in books of account'. The 'aggregate value of total assets of the undertaking or division' is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

3. The assessee is a company engaged in the business of manufacture and sale of aluminum extrusion with anodizing and power coating. During the previous year, the assessee effected a slump sale of its aluminum extrusion business to M/s. Bhoruka Extrusions Pvt. Ltd., under business transfer agreement (BTA) dated 01.03.2013. The AO noticed that as per the business transfer agreement clause 3.1.1, the total consideration agreed upon between the parties was a sum of Rs.110 Crores. However, in the

Page 4 of 18

computation of capital gain, the assessee has adopted the slump sale consideration at Rs.103,47,21,564/-. The AO was of the view that since the slump sale consideration was Rs.110 Crores, that should have been the starting point of computation of capital gain. The AO therefore called upon the assessee to clarify as to how the capital gain of slump sale was computed by the assessee.

4. The assessee, in reply, submitted that Clause No.3.1.2. of the BTA it has been provided that out of the total enterprise value of Rs.110,00,000/- the Initial Business Transfer Consideration shall be only Rs.100,00,00,000/- (One Hundred Crore Only) and the remaining Rs.10,00,00,000/- (Ten Crore) shall be subsequent business transfer consideration which shall be payable in the matter mentioned below:

a. Rupees Five Crores on achieving prescribed Sales and Collection Targets within first 2 years; _

b. Rupees Five Crores on clearing all the legal issues and other tax disputes.

Accordingly, Rs.100,00,00,000/- of the Initial Business Transfer Consideration and Rs.3,47,21,564/- of Net Current Assets (NCA) difference were received immediately on sale. The legal case in connection Excise Duty has decided in favour of the Assessee by the Hon'ble High Court but the department has appealed to the Hon'ble Supreme Court and since it will take time for a decision in the remaining sum was not payable to the Assessee and hence not offered to tax in the present AY 2014-15. Hence, the Assessee did not consider the entire slump sale consideration of Rs.110 Crore, as full value of consideration received/or accrued on transfer. The Assessee submitted that the remaining sum will be offered to tax in the year in which the Assessee receives the said sum. vide another letter dt. 30.12.2016, the assessee submitted that it received a sum

Page 5 of 18

of Rs.4,38,20,000/- during the Assessment Year 2015-16 and the same was offered to tax in AY 2015-16.

5. The Assessing officer did not accept the above submission of the Assessee for the reason that as per section 45, any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. Section 50B(1) of the Income-tax Act also clearly states that any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. According to the AO, therefore since the transfer of the undertaking through slump sale was complete during the previous year relevant to AY 2014-15, the entire consideration for the slum sale, viz., Rs.110 crores ought to have been adopted as the full value of consideration received The assessee's contention is that the remaining Rs.10,00,00,000/- is payable upon fulfilling of certain conditions and therefore the said sum will be offered to tax as and when the same is received by the Assessee was not accepted by the AO. In this regard, the AO referred to clause 3.1.2 of the BTA, which are again extracted for the sake of clarity:-

a. Rupees Five Crores on achieving prescribed

Sales and Collection Targets within first 2

years; ,

b. Rupees Five Crores on clearing all the legal

issues and other lax disputes.

Page 6 of 18

According to the AO, the fulfillment of the aforesaid clauses is a not a condition precedent for the transfer of the undertaking from the Assessee to the transferee and are purely condition to be satisfied subsequent to slump sale and will therefore not postpone the year of transfer and chargeability of capital gain on slump sale. The AO also observed that the assessee offering to tax the remaining consideration in a subsequent year cannot alter the year of taxability since the capital gains had already accrued in the year of sale, there being no express clause to the contrary in case of non-fulfilment of the conditions under clause 3.1.2. of the BTA. He also observed that the Assessee has adopted a colourable device to postpone the tax liability. The AO therefore rejected the assessee's contention and proceeded to bring to tax the capital gains by adopting the entire sale consideration at Rs.110,00,00,000/- as per Business Transfer Agreement dated 01.3.2013, since it had accrued in the year of sale, i.e., AY 14-15. The long term capital gains was accordingly recomputed as under:-

Slump sale consideration adopted as per 110,00,00,000 Business Transfer Agreement dated

01.03.2013

Add Difference in Net Current 3,47,21,564 Assets as adopted by the

assessee

Sale consideration on account of slump sales 113,47,21,564 Less Consultancy & post closing expenses as per 5,11,40,000 assessee

Net proceeds of slump sale 108,35,81,564

Less Net Current Assets as per 8,43,83,680 54,87,45,026 assessee

WDV of assets as per assessee 46,34,44,923 Book value of land 9,16,423

Long term capital gain on 53,48,36,538

slump sale

Page 7 of 18

6. On appeal by the assessee, the CIT(A) agreed with the contention of the Assessee that because of clause 3.1.2 of the BTA, the remaining sum of Rs.10 crores had to be taxed only in the year of it's receipt. He referred to the relevant clause of the BTA:

(b) Initial Business Transfer Consideration An amount of INR 1,000,000,000 (Indian Rupees One Billion Only) shall be payable on transfer of the Aluminium Extrusion Business on the Closing Date, subject to the adjustment/deduction of an amount calculated in accordance with Clause 3.2 below ("Initial Business Transfer Consideration"). For the purpose of calculating the stamp duty payable on the Transaction Document, the details of payment of the Total Business Transfer Consideration is set out in Schedule 9.

(c) Subsequent Business Transfer Consideration Subject to Clause 3.13 below, the,remaining amount of INR 100,000,00 (Indian Rupees one Hundred Million Only) (Subsequent Business Transfer Consideration") shall be payable in the following manner.

(i) in the event that the purchaser achieves the following:

(A) sales of 3,000 (three thousand) metric tonnes or more in any continuous 6(Six) month period within the first 2(two) years from the closing date, and

(B) at least 99% of the receivables/payments for the sales referred to in (A) above, is received within 3(three) months from the date of the last shipment for such sales,

Then an amount of INR 50,000,00 (Indian Rupees Fifty Million Only) shall be payable within 30 (thirty) days from the fulfillment of the conditions specified above, subject to deduction of amounts pursuant to Clause 3.13

(ii) the remaining amount of INR 50,000,000 (Indian Rupees Fifty Million Only) shall be payable within 30 days from the date which is the third anniversary of the closing date only if the purchaser achieves

Page 8 of 18

the sales and collection target mentioned in Clause 3.1.2 (c)(i) above, subject to deduction of amounts pursuant to Clause 3.1.3. 3.1.3 it is agreed and understood that the Subsequent Business Transfer Consideration shall be payable by the purchaser to the seller, subject to adjustments of the following amounts, if applicable:

a) Any claim of indemnity by any if the Purchaser Indemnified Parties against the seller and/or the Promoter Group under any of the Transaction Documents inclosing for breach of the provisions of this Agreement;

b) Any loss to any Purchaser Indemnified Party arising out of or in connection With the pending tax disputes of the seller with the Governmental Authorities, the details of shall be set out in Schedule 10 ("Tax Disputes"). It being clarified that :(a) the seller shall be solely responsible for any liability arising out to Tax Disputes, and (B) in the event that the amount of loss or indemnity to nay of the Purchaser Indemnified Parties as contemplated under this Clause 3.1.2 exceeds the Subsequent Business Transfer Consideration, then the seller and/or promoter Group shall Separately indemnify the Purchaser Indemnified Parties for such excess amount also; and,

c) Any other amounts and monies payable by the seller and/or the Promoter Group to the Purchaser or YKK under or in connection with this Agreement, inter alia, including for claims made by nay customers to the Purchaser for refund of die deposits."

According to CIT(A), liability to pay tax arises in the year in which the conditions are fulfilled by the Assessee and the remaining sum is received by the Assessee. Since, the remaining sum is payable on fulfillment of certain conditions, it cannot be taken into taxable income until fulfillment of those conditions. He therefore allowed the appeal of the Assessee.

Page 9 of 18

7. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. The Learned DR placed reliance on the decision of Hon'ble Delhi High Court in the case of Ajay Guliya Vs. ACIT in ITA No.423/2012, judgment dated 16.07.2012. In that case the Assessee was a shareholder of one Orion Dialog Pvt. Ltd. He divested its shareholding (1500 shares) in favour of M/s Essar Investments Ltd. through a Share Purchase Agreement (` SPA', for short) dated 15.2.2006. The Assessee had offered a sale consideration of Rs.60 lakhs being the price of 1500 shares at Rs.4,000/- per share. The SPA was concerned with the sale of 20,000 shares of the Orion Dialog of which the Assessee held 1500 shares. The total consideration agreed upon in respect of each share was Rs.5750/- of which Rs.4000/- became payable on the execution of SPA and the balance was payable over a period of two years. The Assessing Officer by assessment order dated 24.12.2008 held that the entire income accruing to the assessee was reckonable as capital gains. The first appellate authority held that such part of the consideration which was payable in future did not constitute income for the relevant assessment year and that the assessee would become entitled to it on the fulfillment of certain conditions which could not be predicated. On appeal by the Revenue, the Tribunal (ITAT) held as under :

"6.10 In view of the deeming fiction contained in section 45(1), it is held that the whole of consideration accruing or arising or received in different years is chargeable under the head capital gains in the year in which the transfer of shares has taken place. It may be mentioned here that the exception to sub-section (1) are provided in other sub-sections. The case of the assessee does not fall in any of the exceptions. Undoubtedly and admittedly the shares have been transferred in this year. Therefore, we agree with the AO that the whole consideration of Rs. 86.25 lakh is chargeable to tax as capital gains in this year. The assessee has

Page 10 of 18

also claimed the whole cost. Therefore, the order of the ld. CIT(Appeals) is set aside and that of the AO is restored." Against the decision of the Hon'ble Tribunal, the assessee filed appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court agreed with the reasoning of the Tribunal and held as follows:

"7. The reasoning of the Tribunal is premised upon the fact that capital assets were transferred on a particular date the assessees passed on the execution of the agreement. There is no material on the record or in the agreement suggesting that even if the entire consideration or part is not paid the title to the shares will revert to the seller. In that sense the controlling expression of "transfer" in the present case is conclusive as to the true nature of the transaction. The fact that the appellant assessee adopted a mechanism in the agreement that the transferee would defer the payments would not in any manner detract from the chargeability when the shares were sold.

8. It was lastly submitted that the Tribunal's findings are based upon its understanding about the characterization of the receipt and it has not dealt with the deeming fiction about the accrual which is dealt with by Section 48. We are unable to agree.

The tenor of the Tribunal's order is that the entire income by way of capital gains is chargeable to tax in the year in which the transfer took place. This is what is stated in Section 45(1). Merely because the agreement provides for payment of the balance of consideration upon the happening of certain events, it cannot be said that the income has not accrued in the year of transfer.

9. In view of the above reasoning we are of the opinion that no substantial question of law arises for consideration. We are in agreement with the decision of the Tribunal. The appeal is accordingly dismissed."

Page 11 of 18

8. The learned DR drew attention to the BTA and submitted that the fulfillment of the condition laid down in clause 3.1.2 is not a condition precedent for the agreement to come into effect. In fact, clause 5.2 of the agreement clearly specifies, the condition precedent for the transaction to take effect and clause 3.1.2 or the conditions laid down therein has no reference in this clause. The transaction therefore is deemed to be completed on conclusion of the slump sale during the previous year relevant to AY 2014-15 and there was no non-satisfaction of any condition precedent. It is not the case of the assessee that the condition precedent as mentioned in clause 5.2 of the agreement is not fulfilled. It was submitted by him that Sec.50B(1) of the Act, read with Sec.45(1) of the Act, would clearly show that the year of chargeability of capital gain is the year of transfer that one cannot split the full value of consideration and offer one portion in one AY and another portion in another AY and such a procedure is unknown to law. He therefore submitted that the AO was justified in adopting Rs.110 crores as the full value of consideration on slump sale for computation of capital gain on slump sale.

9. Learned Counsel for the assessee on the other hand placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Mrs.Hemal Raju Shete ITA No.2348 of 2013 dated dated 29^thMarch, 2016. In that case, under an agreement dated 25.1.2006, Shete family sold their business for a sale consideration of Rs.20 Crores. The AO considered the entire sale consideration of Rs.20 crores for the purpose of computation of capital gain. The CIT(A) observed that the agreement dated 25th January, 2006 also provided for deferred consideration which was capped at Rs.20 crores, which had to be paid in terms of formula prescribed in the agreement dated 25th January, 2006. The working out of the formula could

Page 12 of 18

lead and in fact had led to a situation where no amount on account of deferred consideration for the sale of shares was receivable by the assessee in the immediate succeeding assessment year i.e. assessment year 2007-08. On the analysis of agreement, the Commissioner of Income-Tax (Appeals) concluded that the amount of Rs.20 crores is the maximum amount that could be received by all co-owners under the agreement from M/s. RKHS. However, on working of the formula there was no guarantee that this amount or for that matter any amount would be received. He therefore held that the amount received/ accrued alone be considered for compuitating capital gain. The Tribunal held that what amount has to be brought to tax is the amount which has been received and/or accrued to the assessee and not any notional or hypothetical income as the revenue is seeking to tax the assessee in the subject assessment year 2006-07. On further appeal, the revenue contended that in terms of section 45(1) of the Act that transfer of capital asset would attract the capital gains tax and the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration. The Hon'ble High Court held that in the subject assessment year no right to claim any particular amount gets vested in the hands of the assessee. Therefore, entire amount of Rs.20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the assessee. The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. The amounts to be received as deferred consideration under the agreement could not therefore be subjected to tax in the assessment year 2006-07 as the same has not accrued during the year. The following were the relevant observations of the Court:

"8. In the present case, from the reading of the above clauses of the agreement the deferred consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10. Further the

Page 13 of 18

formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the respondent-assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration. The consideration of Rs.20 crores is not an assured consideration to be received by the Shete family. It is only the maximum that could be received. Therefore it is not a case where any consideration out of Rs.20 crores or part thereof (after reducing Rs.2.70 crores) has been received or has accrued to the respondent assessee. As observed by the Apex Court in Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835.

"The income can be said to accrue when it becomes due.... The moment the income accrues, the assessee gets vested right to claim that amount, even though not immediately." In fact the application of formula in the agreement dated 25th January, 2006 itself makes the amount which is receivable as deferred consideration contingent upon the profits of M/s.Unisol and not an ascertained amount. Thus in the subject assessment year no right to claim any particular amount gets vested in the hands of the respondent-assessee. Therefore, entire amount of Rs.20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the respondent- assessee. The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. In fact as observed by the Supreme Court in E.D. Sassoon & Co. Ltd. Vs. CIT (1954) 26 ITR 27 "It is clear therefore that income may accrue to an assesee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro …. …. ….". In this case all the co-owners of the shares of M/s.Unisol have no right in the subject assessment year to receive Rs.20 crores but that is the maximum which could be received by them. This amount which could be received as deferred consideration is dependent/contingent upon certain uncertain events, therefore, it cannot be said to have accrued to the respondent-assessee. The Tribunal in the impugned order has correctly held that what has to be taxed is the amount received or accrued and not any notional or

Page 14 of 18

hypothetical income. As observed by the Apex Court in Commissioner of Income-Tax vs. M/s. Shoorji Vallabdas and Co. (1962) 46 ITR 144

"Income-Tax is a levy on income. No doubt, the Income-Tax Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize." In this case Rs.20 crores cap in the agreement is not income in the subject assessment year. It has been observed by the Apex Court in the case of K.P. Varghese vs. Income- Tax Officer, Ernakulam & Anr. 181 ITR Page 597 that one has to read capital gain provision along with computation provision and the starting point of the computation is "the full value of the consideration received or accruing". In this case the amount of Rs.20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated 25th January, 2006 pertaining to the transfer of shares.

9. The contention of the Revenue that the impugned order is seeking to tax the amount on receipt basis by not having brought it to tax in the subject assessment year, is not correct. This for the reason, that the amounts to be received as deferred consideration under the agreement could not be subjected to tax in the assessment year 2006-07 as the same has not accrued during the year. As pointed out above, accrual would be a right to receive the amount and the respondent-assessee alongwith its co-owners have not under the agreement dated 25th January, 2006 obtained a right to receive Rs.20 crores or any specified part thereof in the subject assessment year.

10. In the above view there could be no occasion to bring the maximum amount of Rs. 20 crores, which could be received as deferred consideration to tax in the subject assessment year as it had not accrued to the respondent-assessee.

11. We find that both the Commissioner of Income-Tax (Appeals) and the Tribunal have in view of the clear clauses of agreement dated 25th January, 2006 have in the facts of the present case correctly held that

Page 15 of 18

the respondent-assessee and the co-owners of the shares did not have a right to receive Rs.20 crores in the subject assessment year."

10. He also placed reliance on the decision of the Special Bench in the case of Vireet Investment Pvt. Ltd., 58 ITR (Trib.) 313 (SB) wherein the Special Bench, following the decision of the Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. 88 ITR 192 (SC) held that when two views are possible the view favourable to the Assessee should be followed. He also relied on the decision of Hon'ble Punjab and Haryana High Court in the case of PCIT Vs. Mahipinder Singh Sandhu 416 ITR 175 (P & H) which is in line with the reasoning of the Hon'ble Bombay High Court in the case of Mrs.Hemal Raju Shete (Supra).

11. We have given a very careful consideration to the rival submissions. As we have already noted, from a reading of the provisions of Sec.50B (1) of the Act read with Sec.2(42C) of the Act, it is clear that taxability of capital gain on slum sale arises in the year of transfer of the undertaking. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Perusal of the business transfer agreement dated 01.03.2013 would clearly show that the fulfilment of the condition laid down in clause 3.1.2 is not a condition precedent in the agreement to come into effect. In fact, clause 5.2 of the agreement clearly specifies the condition precedent for the transaction to take effect and clause 3.1.2 has no reference in this clause. It is also not the case of the assessee that the condition precedent as mentioned in clause 5.2 of the agreement is not fulfilled. In fact the Assessee does not dispute that the undertaking stood transferred to the transferee during the previous year relevant to AY 2014-

Page 16 of 18

15. In the facts and circumstances of the case, the computation of capital gain in tune with the provisions of Sec.50B of the Act has to be made in that year. The computation provisions of Sec.50B of the Act is also very clear and provides no lee way for parties to postpone recognizing capital gain in tune with the computation mechanism provided therein. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between 'the aggregate value of total assets of the undertaking or division' and 'the value of its liabilities as appearing in books of account'. The 'aggregate value of total assets of the undertaking or division' is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. There is no scope for any deviation from the aforesaid statutory provisions. Even the provisions of Sec.45(1) provides that any profit or gains arising from transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place. The learned counsel for the Assessee referred to the provisions of Sec.48 of the Act and submitted that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement⁶thereto:

Page 17 of 18

According to him the concept of receipt/accrual is relevant even for charge to tax of income in the form of capital gain. In this regard the learned counsel for the Assessee has placed reliance on the decision of the Hon'ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra). The decision rendered by the Hon'ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra) was a decision rendered in the context of provisions of Sec.45(1) of the Act and has to be read as a decision rendered on its peculiar facts. The ratio laid down therein cannot be extended to a case where computation of capital gain is made u/s.50B of the Act. As we have already explained the statutory provisions, are special provisions applicable to computation of capital gain on slump sale and these provisions specifically lay down the methodology of computation in Sec.50B(2) of the Act, in relation to computation of capital gain. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between 'the aggregate value of total assets of the undertaking or division' and 'the value of its liabilities as appearing in books of account'. The 'aggregate value of total assets of the undertaking or division' is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is

available on cost of acquisition, i.e., net worth. Provisions of Sec.48 & 49 stand substituted by the provisions of Sec.50B(2) of the Act. The methodology contemplated by these provisions cannot be altered or tampered with by reading the terms of the slum sale agreement and deferred payments laid down therein. For these by laying down that when capital

Page 18 of 18

assets being an undertaking or division is transferred by way of slump sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. For the reasons given above, we are unable to agree with the view canvassed by learned Counsel for the assessee. We are of the view that the CIT(A) fell into an error in accepting the plea of the assessee and holding that the sum not received owing to clause 3.1.2 of the BTA cannot be brought to tax in AY 14-15. We therefore allow the appeal of the Revenue.

13. In the result, appeal of the Revenue is allowed. Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/-

(LAXMI PRASAD SAHU) (N. V. VASUDEVAN)

Accountant Member Vice President

Bangalore, Dated: 16.08.2022. /NS/*

Copy to:

1. Appellants 2. Respondent

3. CIT 4. CIT(A)

5. DR 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.

The Assistant Commis... v. M/s. Bhoruka Alumini...